ML - Michigan Avenue

2013 - Issue 2 - Spring

Michigan Avenue - Niche Media - Michigan Avenue magazine is a luxury lifestyle magazine centered around Chicago’s finest people, events, fashion, health & beauty, fine dining & more!

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In October 2006, the Chicago Mercantile Exchange announced it would purchase the Chicago Board of Trade. Jim Oliff, Scott Gordon, and James McNulty of the Chicago Mercantile Exchange commemorate its demutualization. 122-125_MA_FEAT_Heritage_Spring13.indd 124 Craig Donohue and Charlie Carey of the CME Group ring a ceremonial opening bell on the agriculture trading floor. asset? These products could help someone manage any kind of price risk. Over lunch at the Waldorf-Astoria Hotel in New York in ���71, Melamed convinced economist Milton Friedman to do a feasibility study for a new business model. ���We settled on a $7,500 fee for the study, and the Merc is worth $20 billion today,��� Melamed brags. At the time, the new business was little more than a curious sideline, as the Merc unveiled currency trading and the CBOT moved toward bond futures. ���We had simply no idea,��� says Thomas Cashman, a soybean trader who arrived on the CBOT floor as a teenager in the 1950s, working as a ���runner��� carrying orders to and from the trading pit, before becoming a full-fledged member in 1962. It was the open-outcry trading in agricultural commodities like soybeans that gave Chicago���s markets their freewheeling reputation. But they have also borne the brunt of the changes. A decade ago, ���the soybean pit would be full of 100 people or more, yelling and hollering and trying to trade all at once,��� Cashman recalls. One memorable bull market enabled him to pay cash for a new house. In contrast, the soybean pit today is sleepy, with the hubbub having moved over to the financial products and to desks in offices upstairs���and everywhere around the world���where traders stare at computer screens and click to place orders far larger than any that Cashman ever handled. But the slow atmosphere is deceptive. True, Ceres, the CBOT hangout where traders were once able to start their days with a stiff drink and that was said to sell more booze than any other bar in the city, now feels like a backwater, and even the local convenience stores are grumbling that their lottery ticket sales have fallen. But trading volumes at the CME are thriving: an astonishing daily average of 9.6 million contracts this past December. That isn���t because futures trading has vanished, however. ���Before [electronic trading] came along, we struggled to get trading up to $1 million trades a year,��� says Melamed. ���Today we average $11 billion every day.��� The advent of financial futures was just the start, as the globalization of finance and new technologies combined to radically reshape Chicago���s futures trading world. Once, traders had to fight���literally���for a prime position in crowded PHOTOGRAPHY BY SCOTT OLSON/GETTY IMAGES (EXCHANGE, DONOHUE); SCOTT OLSON/LIAISON (OLIFF) F rom fur traders to real estate speculators, Chicago���s settlers gave the city a reputation as a great place for risk takers. But Chicago���s most lasting business legacy may be the enterprise created to help those folks manage all the risks they were running: the futures exchanges created in the 19th century that today ensure Chicago a place on the map as one of the world���s most powerful financial centers. It has been 165 years since a group of merchants assembled not far from where Fort Dearborn still stood to set up the first futures trading exchange. Its successor, the CME Group (now parent company to Chicago���s two original exchanges, the Chicago Board of Trade and the Chicago Mercantile Exchange) is not only alive but thriving, having become the hub of a global industry stretching from Beijing to Mexico City and beyond. It���s unlikely that the CBOT���s founders had any clue what they were doing when they created a place where farmers and grain traders could haggle over the price and delivery terms for upcoming corn or wheat crops. But ultimately Chicago���s traders realized that their forebears hadn���t just set up a commodities market but had perfected the ideal risk management tool, one that could be redesigned to manage pretty much any kind of market risk. Investment managers in Singapore could turn to Chicago���s futures markets to bet on the direction of US interest rates, while European hedge fund managers could place orders to establish positions in Standard & Poor���s 500 stock index via computers connecting them to the Chicago exchange. That epiphany transformed Chicago���s markets from a Wall Street sideshow to a main event. The realization came in the nick of time. Over at the Chicago Mercantile Exchange (which was founded in 1898), trading in butter, eggs, and onions had long stopped by the mid-20th century; attempts to introduce shrimp and turkey futures contracts had never taken off, leaving the Merc with only its pork belly, live cattle, and hog futures. At times, trading was so slow that Merc members could be found gambling on gin rummy instead of commodity prices. ���There wasn���t another animal out there we could trade,��� recalls Leo Melamed, a lawyer turned trader who became chairman of the Merc in 1969. Melamed learned early just how currency values could fluctuate. Born to a Jewish family in Poland, his father introduced him to the concept in the process of fleeing the Nazi invasion, pointing out how Polish zlotys weren���t worth as much as they had been at a bakery in Lithuania. Melamed���s father was stubborn and lucky and able to get his family to the United States via the Soviet Union Siberia and Japan, arriving in early 1941. A refusal to admit defeat ran in the family; Melamed found himself pondering currency price movements as he and his peers sought new strategies for the Merc. Why, they wondered, couldn���t Chicago���s markets trade futures contracts on any kind of 2/8/13 2:06 PM

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